What should we make of a federal court’s shooting down the FCC’s net neutrality regulations?

A US federal court recently ruled that the Federal Communications Commission’s (FCC) 2010 regulations enforcing net neutrality overstepped its legal authority. Here is what to make of the ruling.

But first, what is net neutrality? In short, it is an open internet policy. Under net neutrality, internet service providers (ISPs) are barred from speeding up or slowing down certain websites, while leaving others alone. More relevantly, ISPs cannot take payments from a company in exchange for speeding up how its site loads or slowing down the speed of competitors’ sites. The ISP also cannot deliberately slow down sites whose political or social agenda it disagrees with.

So what is in store for net neutrality now that the FCC has been overruled in its attempt to keep the internet open?

Net neutrality is not just a civil liberties issue anymore

The momentum that first pushed net neutrality to the forefront came from free speech advocates like the Electronic Frontier Foundation. But now it is clear that net neutrality matters for businesses and markets as well. Without net neutrality, ISPs can give content providers an ultimatum: If you want to get your product to customers faster than your competition, you must pay to play. The earnings of Amazon, Google and other major companies could take major blows.

Perhaps no company stands to be hurt more by this court ruling than Netflix, which is responsible for up to 1/3 of the US’s internet bandwidth at any time and has a subscriber base of 34 million. Not intimidated by the threat of being targeted by ISPs, Netflix is threatening to turn those 34 million subscribers against any ISP that tries to exploit the court’s ruling.

This ruling made clear that the big corporate cold war of the future will not be Google versus Apple. It will be content providers against ISPs. It looks like media streaming services like Netflix, Pandora and YouTube will have a chilly relationship with Comcast and Verizon.

No net neutrality is bad for everybody except ISPs

Without a doubt, the rise of HD video services and ubiquity of internet usage has put pressure on ISPs’ networks. Without net neutrality to limit how ISPs structure their pricing, they now have much more flexibility in how they take in revenue. Whether that has put a significant financial burden on them is another story. In Comcast’s 2012 Letter to Shareholders, it boasted that its high-speed internet business was a major growth area and that investment in its internet business has had great returns. Regardless, ISPs will benefit from their new-found flexibility.

On the other hand, internet users might face higher bills to surf their favorite websites. From per-gigabyte charges becoming more common to having to pay extra to watch YouTube, anything is possible now. Only time will tell, but it is a fair bet that using the internet will be more expensive for users.

The future is uncertain for internet businesses as well, especially those that use lot of bandwidth or do not have the money to pay off ISPs. Without the guarantee that their services will get to customers at the speed they imagine it, a pay-to-play internet could stifle new online products and services. Competition on the internet could get more vicious as well. No longer are companies competing just on the quality of their product, but also on their ability to negotiate favorable treatment from the biggest ISPs.

US internet regulations are designed for a pre-internet world

At the center of the case was the question of how the internet is classified by the FCC. Instead of being called a telecommunications service, the internet is regulated as an information service. The difference might seem irrelevant, but the FCC has much wider authority to regulate telecommunications services like television and telephones.

The classification goes back to 2002, when the internet was a very different place. Amazon’s revenue was 1/15th of what it is today and Twitter, Gmail and Facebook did not even exist yet.

The way we use the internet keeps evolving, and the laws that regulate it cannot keep up. Similar fights are being waged over sales taxes on the internet, online gambling and adult material. The trouble is that institutions, especially in the US, adapt slowly to new technologies. The implications of new regulations are not always clear, and at other times there are organized and well-funded groups that have an interest in preventing the regulations from changing.

The future of net neutrality is anybody’s guess

The Obama Administration is a strong proponent of net neutrality (even if the new FCC Chairman Tom Wheeler is less supportive than his predecessor Julius Genachowski) and likely to continue its push for it. There are three ways it could do so.

First, the FCC could appeal the case to the Supreme Court. It has indicated that it is looking strongly at this option. However, it would be a big risk given the shaky legal authority the FCC used.

Second, there are also rumblings that the FCC will ask for a rehearing at the same federal court, which entitles the case to be heard by all the judges instead of the panel of three that previously ruled on it. With more Obama court appointees taking the bench, this option seems more likely to end in an FCC victory.

Third, and least likely to be fruitful, would be to push for Congressional action. Either net neutrality could be encoded in law, or the internet could be reclassified as a telecommunications service. Neither is likely to happen given Congress’s inability to pass laws and ISPs’ strong lobbying connections.

In the meantime, net neutrality is a thing of the past. ISPs are likely to start exploring new models of pricing for their customers and strategic agreements with content providers. This could mean bundling services and charging a premium for quicker access to bandwidth-intensive content – or for whatever else ISPs want. ISPs could also entertain pay-to-play offers, such as Apple paying Comcast for fast iTunes downloads and slow Spotify streams. But in truth, anything could happen – and that is the scary part for internet companies.

It might be a blessing in disguise

Although net neutrality’s loss in federal court might seem pretty dire for anybody except ISPs, note that it was only the FCC’s justification for legal authority over net neutrality that was overruled. The concept of net neutrality escaped untouched, leaving open the option that it can re-emerge sometime in the near future.

Since the FCC had to jump through intellectual hoops to justify its legal authority to regulate the internet, a ruling that upheld the justification could have been used in the future for a whole host of dubious purposes. The same justification could be used to for censoring or shutting down any part of the internet that is deemed unwholesome. Even many proponents of net neutrality questioned the use of this justification for this reason.

While the FCC decides its next move, both ISPs and internet businesses will be watching eagerly. Their business models could have to change significantly based on what happens next, and it is likely to impact how businesses and customers interact in the digital age.

Author:Alex Christensen

Alex Christensen focuses on the impact policymaking has on the economy. He previously was an economic policy analyst at Minnesota 2020, a non-partisan think tank based in St. Paul, Minnesota. As the Hirsch Undergraduate Fellow at the Center for New Institutional Social Sciences, he analyzed how political institutions impact the development of wind power across the OECD countries. Alex is currently studying for his MSc in Economics at the London School of Economics, where his thesis examines the connection between monetary policy and equity prices. Previously, he graduated magna cum laude from Washington University in St. Louis with a degree in economics and political science.

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